CHAPTER 3

Key Financial Sectors Issues

1 KEY FINANCIAL SECTOR ISSUES

1.1 INTRODUCTION
1. Zambias financial sector is at a rudimentary stage, with limited financial
intermediation and low public confidence. Zambia still has one of the lowest levels of
financial intermediation in sub-Saharan Africa: This chapter offers a global assessment of
common sector-wide challenges and recommended solutions

1.2 THE FINANCIAL SECTOR

1.2.1 Financial Institutions

2. Since independence in 1964, the financial sector in Zambia has undergone two
notable phases in its development. First, during the early 1970s when the Governments
nationalisation program had an important impact upon the sector. Although commercial
banks were not nationalised, all other major financial institutions were nationalised and
merged to form government owned institutions such as the Zambia State Insurance
Corporation (ZSIC) and the Zambia National Building Society (ZNBS). Entry of non-bank
financial institutions into the financial sector became restrictive. However, Government
established financial, institutions such as the DBZ, the Local Authority Superannuation
Fund (LASF) and the Zambia Export and Import Bank, through Acts of Parliament.

3. The second phase of notable change in the financial sector in Zambia has been the
liberalisation of the sector, and the economy generally, since 1991. The liberalisation led to
the entry of new financial institutions into the industry.

4. The financial sector has grown and now comprises the Central Bank, commercial
banks, non-bank financial institutions (comprising the three building societies, some micro
finance institutions, the National Savings and Credit Bank (NSCB), the DBZ, the 37
Bureau de changes and leasing companies), insurance companies, pension funds and the
capital markets.

5. Despite entry of new financial institutions after the liberalisation of the economy,
the Zambian financial system has remained relatively small. The ratio of M2 to GDP has
been in the range of 15 20 percent over the last five years, within the middle range for
monetisation ratios of Sub-Saharan African Countries. In the early 1980s, M2 was about

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35 percent of GDP. Bank credit- at 8 percent of GDP is-is among the lowest for Sub-
Saharan countries and is exceeded by credit to the public sector. Dollarisation is high with
about half of bank deposits and one third of loans in foreign currency.

6. The state owned Zambia National Commercial Bank (ZNCB) and foreign owned
banks dominate the financial sector. Commercial banks hold about 90 percent of financial
system assets and foreign equity participation is significant, accounting for three quarters of
the banking system capitalisation. The banking system is comprised of 13 commercial
banks. There are five large banks (Barclays Bank, Standard Chartered Bank, City Bank,
Stanbic Bank and Zambia National Commercial Bank) four of which are subsidiaries of
multinational banks (SMBs). In terms of assets, Barclays is the largest bank followed by the
Government bank, Zambia National Commercial Bank (ZNCB), which is in the process of
being privatised.

7. The insurance business is very small in Zambia and contributed 1.5 percent of
GDP in premiums in 2000. The insurance market is dominated by an insolvent public
institution, the Zambia State Insurance Corporation (ZSIC). Since deregulation in 1992, a
number of locally registered insurance companies have emerged.

8. The pension sector in Zambia comprises the National Pension Scheme (NPS),
which is mandatory for all employees in the formal sector, and supplementary schemes,
which are offered by private sector employers. There are over 200 of these independently
administered pension schemes, which include both defined benefit and defined
contributory plans. The supplementary pension schemes- at about K 360 billion- have the
largest assets in the pensions sector, while the NAPSA represents over K 230 billion.

9. There are four other types of non-bank financial institutions in Zambia. These are:

i. Institutions that accept deposits from the public, including the three building
societies, some micro finance institutions, and the NSCB;
ii. Leasing companies;
iii. Thirty-seven bureaux de change; and
iv. The DBZ, which previously financed itself from foreign development banks.
10. Government owns three of the non-bank financial institutions namely, the DBZ,
the ZNBS and the NSCB.

11. Leasing companies undertake a diverse range of financial services including

factoring and trade finance, term lending, corporate finance advisory services, investment

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advisory services, corporate restructuring, treasury management as well as traditional

leasing activities. Leasing companies are financed largely through donor lines of credit, and
the issuance of promissory notes or debentures to institutional investors, notably, the
NAPSA.

12. The micro finance industry is relatively new in Zambia and serves a very small
percentage of the population.

1.2.2 Financial Markets

13. Zambias financial markets are thin and largely short term, in part reflecting
prolonged periods of high inflation, and volatility in interest rates. The inter-bank market is
concentrated in the overnight maturity. The primary market for government securities has
been growing rapidly but the secondary market is very small, as banks hold bills to
maturity. Interest rate volatility in the inter-bank market has remained quite high. This has
been attributed to sharp swings in flows of cash between the government and the private
sector.

14. The foreign exchange market is characterized by the concentration of supply in a

small number of large exporters and foreign aid. The BoZ has discontinued auctions of
foreign exchange at the dealing window on 23 July 2002 and introduced the inter-bank
foreign exchange market. This ensures that the exchange rate reflects conditions in the
market.

15. The stock market in Zambia is small with a market capitalisation was about US $
220 million in March 2002, equivalent of 8 percent of GDP, among the lowest of the
newly established African exchanges. Even with supportive government policy and donor
technical assistance, the stock market has failed to evolve into a viable market. Since its
inception in 1994, the number of companies listed on the Lusaka Stock Exchange has
grown modestly from 7 to 11. Few make more than 10 percent of their shares available for
trading.

16. The major means of retail payment is cash and the payment system is not a source
of systemic risk. This is especially true for the rural population, which is not adequately
served by the banking system. Cheques are currently the major means of non-cash
payments and are cleared at the Zambia Electronic Clearing House (ZECH). The BoZ has
made significant progress in modernising the payments system in Zambia.

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17. There is no formal deposit safety net in Zambia. However, banks facing difficulties
have resorted to credit lines from the BoZ. The BoZ is considering the introduction of a
formal deposit insurance scheme.

1.2.3 Legal and Regulatory Framework

18. The BoZ is the supervisory authority in Zambia for banks and non-bank financial
institutions. It has responsibility for supervising banks, development financial institutions,
leasing companies, building societies, and micro finance institutions. The two other
supervisory agencies are the Securities and Exchange Commission (SEC) and the Pension
and Insurance Authority (PIA).

19. The BoZ Act and the Banking and Financial Services Act (BFSA) provide a legal
framework for the central bank to carry out its supervisory responsibilities.

1.3 HUMAN RESOURCES

20. The financial sector in Zambia recognises that its employees are the most valuable
of its assets and that the successful attainment of its ambitions is directly related to the
quality of staff, their expertise and commitment.

21. There are a number of institutions that play a role in the development of human
resources for the financial sector in Zambia. These include universities,
accountancy/business colleges, commercial banks, the Zambia Institute of Bankers
(ZIOB), regional institutions of learning and non-governmental bodies. However most of
these institutions lack adequate capacity to bridge the skills and knowledge gap.

22. The Government is committed to the promotion of an equal opportunity work

environment and capacity building in ministries, quasi government organisations, on-
governmental organizations and the private sector. It also recognises that the support of
co-operating partners is critical in addressing the constraints and the attendant issues
including HIV/AIDS in the effective operation of a market-driven economy.

1.3.1 Objective

23. To promote and fully utilise the skills, knowledge, personal development and the
enthusiastic commitment of all staff.

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24. Commonly shared resourcing, development and retention strategies are critical
vehicles for developing individual employee effectiveness consistent with the financial
sectors strategic goals.

1.3.2 Constraints and Issues

25. The following have been identified as the major impediment to the development of
a sound financial sector:

i. Capacity Building:
Quality of Education: While some institutions can supply qualified graduates more
often than not, the graduates have to be turned into competent workers. This
requires customised training of international standards. Local institutions are
unable to fully fill this gap.
Funding for tertiary education: Inadequate local support for capacity building with a
view to improving the scope and quality of training services available.
Compliance of educational standards: Weak enforcement of compliance of the
educational standards, for instance, forged educational certificates, examination
leakages and credibility of some qualifications.

ii. General Human Resources Management

Resourcing and development approaches: Lack of a unified approach to staff
recruitment, training and development and retention activities within the financial
sectors strategic posture;

Health, safety and environmental issues: Lack of viable workplace policies by some
financial institutions to manage the HIV/AIDS pandemic.

1.3.3 Progress Made to Date

i. Capacity Building

A lot of training intended to raise the competence mix in both the regulatory authorities
and commercial financial institutions.
Funding for tertiary education.

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A few institutions have received financial support especially from donors. The majority
still need a lot of resources to improve the scope and quality of training services
available.
There is some enforcement by relevant institutions in terms of licensing of education
providers and certification.

ii. General Human Resources Management

HIV/AIDS: Some financial institutions have put in place viable policies to
manage the pandemic

1.3.4 Recommendations

i. Realign labour and immigration laws to promote affirmative action by protecting

local labour by third quarter 2006;
ii. Establish a standardized framework of aligning staff recruitment, training and
development and retention activities with the financial sectors strategic posture
by the year 2005;
iii. All staff should possess minimum academic/professional requirements and be
required to be members of relevant professional bodies immediately;
iv. Develop workplace HIV/AIDS policies to preserve vital institutional memory
(people & information);
v. Develop a comprehensive Communal Personal Information System (CPIS) as an
extensive database on both the JOBS and PEOPLE including modules on
turnover of staff, training management, career management and establishment
throughout the sector by second quarter 2006;
vi. Financial institutions to provide internship opportunities for trainees last quarter
2005;
vii. Require the financial institutions to contribute to the provision of opportunities
in higher institutions of learning on grounds of good corporate citizenship. This
may be through scholarships or payment of a specified levy on the lines of the
fuel and medical levies to supplement the governments efforts in running
learning institutions. In addition, tertiary institutions of learning should be de-
politicised and private sector participation in funding these institutions should be
encouraged by last quarter 2005;

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viii. Set up Matching Educational Grant Schemes for human resources development
in priority areas of financial sector competency by last quarter 2005; and
ix. Strengthen the relevant institutions of learning so that they can provide training
that is appropriate to the ever-changing needs of the financial sector. The new
areas requiring training to promote local capacity include by first quarter 2006:

a) Good corporate governance;

b) Money and capital markets operations

c) Alternative Dispute Resolution

d) Actuarial and fund management

e) Investment and corporate banking

f) Treasury management

g) Operation and management of micro finance and rural banking

h) Forensic accounting and investigation;

i) Detection and prosecution of commercial crimes;

j) Marketing; and

k) Financial regulation.

1.4 CORPORATE GOVERNANCE

26. Corporate Governance refers to the manner in which the power of a corporation is
exercised in the stewardship of the corporations total portfolio of assets and resources
with the objective of maintaining and increasing shareholder value with the satisfaction of
all stakeholders (employees, suppliers, customers, society) in the context of the corporate
mission

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1.4.1 Objectives

27. Good corporate governance aims to promote:

i. Efficient, effective and sustainable corporations that contribute to the welfare

of a society by creating wealth, employment and solutions to emerging
challenges
ii. Responsive and accountable corporations;
iii. Legitimate corporations that are managed with integrity, probity and
transparency;
iv. Recognition and protection of stakeholders rights; and
v. An inclusive approach based on democratic ideals, legitimate representations
and participation.
28. Corporate governance for the Zambias financial sector has largely been weak.
This is because the good corporate governance practices have not yet been fully embraced.

1.4.2 Constraints and Issues

29. Although some good corporate governance principles have been provided by the
Companies Act, the Securities Act and Stock Exchange Listing Requirements as well as the
Banking and Financial Services Act, the principles therein are not exhaustive and their
enforcement leaves much to be desired. As a result there is:

i. Lack of quality boards in a number of corporate bodies;

ii. Prolonged existence of interim boards;

iii. Some inappropriate shareholding structures;

iv. The anomalous phenomenon whereby the same individuals are present on
several boards;

v. Prevalence of non separation of powers of Board Chairpersons and Chief

executives;

vi. Lack of transparency in the appointment and removal of Directors and Chief
Executives;

vii. Weak legislation in managing private and public sector companies disclosures;

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30. The Companies Act has only made provision for the following:

i. Accountability and responsibility of the Board of directors to the

shareholders through the requirement to generate, maintain and present
annually to members audited annual financial statements.
ii. Shareholders rights on the appointment of directors and auditors.
iii. Shareholders meetings as the supreme corporate body vested with powers to
make major decisions of the company.

31. The Securities Act, which only applies to public companies and other entities that
issue tradable securities, reinforces the Companies Act on corporate governance,
particularly on the financial accountability of the Board of Directors to shareholders and
the disclosure of other prescribed price-sensitive information.

32. The Banking and Financial Services Act, which only applies to banks and financial
institutions requires the Board of Directors to be accountable not only to shareholders, but
to stakeholders (depositors) and to the BoZ

33. Although the LuSE Listing Rules require listed companies to adhere to a code of
corporate governance and to disclose in annual reports the extent of compliance with the
code the said code is yet to be adopted.

34. Lack of legislation on the enforcement of Good Corporate Principles;

1.4.3 Progress Made to Date

i. Establishment of the Institute of Directors;

ii. Some training of Boards and management in both the private and public
institutions;
iii. Amendment of the BFSA on the:
a. need for majority non-executive directors on boards;
b. screening of shareholders, CEO and CFO by the BOZ; and
c. cap of 25% shareholding in financial institutions.
iv. Some draft strategy documents to promote good corporate governance in financial
institutions.
v. Shareholding structures

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1.4.4 Recommendations

i. Develop code of good corporate governance for all the financial market licensees
and participants, which must prescribe the best practice principles to be followed;
ii. Facilitate adoption of good corporate governance principles by encouraging
institutional investors to invest in companies that observe good corporate
governance structures;
iii. Conducting training programmes to inculcate good corporate governance
principles; and
iv. Strengthen legislation to facilitate enforcement of good corporate governance
principles.

1.5 LEGAL INFRASTRUCTURE

35. The Zambian legal system is founded on English common law and principles of
equity applied by English courts, complimented and varied in some aspects by a series of
statutes passed by the Zambian parliament since independence. The legal infrastructure
incorporates a judicial system, which comprises the Supreme Court, the High Court, an
Industrial Relations Court and lower courts.

36. Whereas a number of legislative changes have taken place under the English Acts,
the Zambian laws have tended to stagnate and not respond to the changes in the socio-
economic environment.

37. Prior to 1991, there were no notable developments in the legal and regulatory
framework of the financial sector. This was largely due to public sector-led policies that
did not favour private initiative.

38. After 1991, the Government embarked on an Economic Reform Programme,

which necessitated the reform of the legal and regulatory frameworks of the financial
sector. However, a limited number of amendments to existing legislation to address new
areas of financial sector operations and the strengthening of the existing legal and
regulatory framework were effected.

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1.5.1 Constraints and Issues

39. The legal and judicial system is unsatisfactory in many respects, with shortcomings
such as the following.

i. Delays in delivering judgments due mainly to the workload;

ii. The lengthy process in the disposal of court cases;
iii. Lack of reported judgements;
iv. Infrequent revision of the laws;
v. Bureaucratic procedures leading to delays in the enactment of new laws;
vi. Fragmented laws relating to the financial sector;
vii. Lack of guidelines and directives under principal Acts;
viii. Lack of adequate legal framework for regulating foreign currency transactions;
ix. Lack of financial sector consumer protection laws;
x. Inadequate skills for enforcement of the law relating financial crimes; and
xi. Tendency not to report financial crimes to the relevant law enforcement agencies.

1.5.2 Progress to date

i. A law review committee has been formed within the BoZ

ii. A law review exercise to identify financial sector legislation that requires to be
harmonised, repealed or consolidated has been commenced.
iii. Draft anti-money laundering directives have been submitted to the Anti-Money
Laundering Investigations Unit.
iv. Draft National Payment Systems Bill has been submitted to the Ministry of Finance
for the legislative process.
v. Draft Micro-finance Regulations are about to be submitted to the Ministry of Finance
for the legislative process.

1.5.3 Recommendations

i. Improve justice delivery system through adequate staffing and training;

ii. The judiciary should recruit full-time staff to deal with law reporting;
iii. Publication of law reports should be liberalised;

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iv. Encourage the use of ADRs mechanisms in resolving commercial disputes;

v. Reform and develop the laws relating to the financial sector;
vi. Streamline the procedures for law reform and development;
vii. Harmonise the laws relating to the financial sector including:
a) Banking and Financial Services Act
b) BoZ Act
c) Companies Act
d) Insurance Act
e) Securities Act
f) Building Societies Act
g) National Pension Scheme Act
h) Societies Act
i) Co-operative Societies Act
j) The Accountants Act
viii. Strengthen the corporate governance provisions in the laws relating to the
financial sector including whistle-blowing;
ix. Pass the necessary regulations to give effect to the Prohibition and Prevention of
Money Laundering Act number 14 of 2001;
x. Enact specific legislation on insolvency, liquidations and winding up of
companies, bodies corporate registered under the Societies and Co-operative
Societies Act that are engaged in the financial sector or in the alternative
strengthen provisions of existing laws;
xi. Enact financial sector consumer protection laws;
xii. Review of criminal legislation and provisions that provide for the enforcement of
regulatory powers;
xiii. Issue or pass appropriate regulations and directives to support principal Acts;
xiv. Identify and implement consistent and sustainable method of funding the
judiciary;
xv. Enact a law to prescribe how banks, financial institutions and tourist enterprises
should handle foreign exchange transactions;
xvi. Enact a law that will regulate or govern the use or misuse of computer
technology in financial and other business transactions; and
xvii. Establishment of a permanent law review committee to address harmonisation
and review of various financial sector laws.

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1.6 ACCOUNTING AND AUDITING STANDARDS

40. In Zambia, the profession of accountancy is governed and regulated by the
Accountants Act of 1982, which provides for the regulation of the education and training
of accountants and advancement of accountancy and allied subjects. The Act also caters
for regulation and control of the practice of accountancy in Zambia.

41. The Act, established the Zambia Institute of Chartered Accountants (ZICA),
whose function has been to register accountants, licence and regulate auditing, monitor and
enforce disciplinary measures against erring accounting firms and individual members of
ZICA.

42. The enforcement of the Accountants Act is facilitated by the ZICA constitution
and the code of ethics. The ZICA Council, as a supreme governing body, and its sub-
committees are responsible for the running of ZICA. ZICA is a self-regulating institute, as
all members of the ZICA Council (with the exception of two Government appointed ex-
official) and its Sub-Committees are registered accountants and any vacancies on the
Council or committees are filled through elections.

43. Under the Act, ZICA is also responsible for the advancing of accounting
education, provide accounting qualifications by examination and accredit foreign
accounting qualifications (in appropriate membership grades of ZICA).

44. The accounting profession is further subject to the provisions of the Companies
Act, which requires accounting standards to underpin the preparation of financial
statements. The Act also requires that the financial statements of public companies are
audited and provides for both the qualification/disqualification of auditors.

45. However, the practice of accounting is characterised by the existence and adoption,
by business entities, of different accounting standards frameworks. The adoption of a
particular accounting standard is usually driven by the domicile and reporting requirements
of the holding companies or sponsors. Despite the apparent existence of several
accounting standards in Zambia, such as those issued by the Financial Accounting
Standards Board in the United States, the Accounting Standards Board in the United
Kingdom and International Accounting Standards Board, the ZICA has no legal power to
impose any particular accounting standards to underpin the preparation of financial

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statements. ZICA only encourages its members to adopt accounting standards it has
adopted.

1.6.1 Objectives

i. Provision of services of consistently high quality;

ii. Standardization of accounting practice will enhance market discipline by encouraging
transparent reporting;
iii. Easier comparability or assessment of financial condition and performance;
iv. Protection of the general public when investing in savings, stocks and shares; and
v. Interdependence of financial markets requires accurate and transparent financial
reporting.

1.6.2 Constraints and issues

46. The present Companies Act and the Accountants Act lack express power for the
respective regulatory authorities to impose any particular accounting standards to underpin
the preparation of financial statements or expression of opinions thereon.

47. The ZICA-approved accounting or auditing standards are only applied through
moral suasion. However, since not all members of ZICA may be in positions of influence,
the application of any ZICA approved accounting or auditing standards suffers from lack
of mandatory application.

48. The application of different accounting or auditing standards by business entities,

has lead to a significant limitation in the comparability of the financial condition and
performance of business entities.

49. Another constraint is that the accounting profession is largely self-regulating, with
some members on the Disciplinary Committee of ZICA holding senior positions in
accounting/auditing firms. This has made it difficult for ZICA to investigate and punish
accounting or auditing failure by registered accountants/firms.

50. The Banking and Financial Services Act (BFSA) has no express provision placing
reporting duties on the external auditors to report to the BoZ immediately on the breaches
of the law or regulations, concerns about managements competence, matters of material
significance, issues of going concern and any qualification in their audit opinion.

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1.6.3 Progress to Date

i. ZICA adopted the International Financial Reporting Standards, the International

Accounting Standards and the International Standards on Auditing in August 2003.
However, the adoption takes effect from 1st January 2005.

ii. ZICA has revised the Accountants Act to include protection of accountants for whistle
blowing, an easily accessible complaints procedure, the publication of disciplinary
committee decisions, issuing of the code of ethic under a Statutory Instrument and the
mandatory registration of accountants. The draft Bill has been submitted to the
Ministry of Finance and National Planning.

1.6.4 Recommendations

i. Given the importance of accounting and auditing system in Zambia the Government
(GRZ) should to expedite the promulgation of International Financial Reporting
Standards issued by the IASB and International Auditing Standards issued by the
International Federation of Accountants into the Companies Act;
ii. The Government should expedite the enactment of the revised Accountants Bill;
iii. The review of the BFSA should include a provision to place an obligation on the
external auditors to report to BoZ on the breaches of the law or regulations, concerns
about managements competence, matters of material significance, issues of going
concern and any qualification in their audit opinion; and
iv. ZICA should enhance its enforcement capacity to improve financial institutions
compliance to the Accountants Act, Companies Act and the ZICA ethics.

1.7 REGULATORY STRUCTURES

51. Financial regulation and supervision in Zambia has, over the last decade, been
structured around specialist organs and apart from the BoZ, most were established after
the liberalisation of the economy in 1991.

52. The enactment of the BFSA, Securities Act, the Pension Scheme Regulations Act
and the Insurance Act and related legislation have resulted in distinct and separate

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regulatory responsibilities for the banking, securities, pensions and insurance sectors. The
main regulatory organs that have emerged in the financial sector are:

i. Bank of Zambia;
ii. Securities and Exchange Commission;
iii. Pensions and Insurance Authority;
iv. Zambia Competition Commission; and
v. Patents and Companies Registration Office.

53. There exist a number of overlaps and areas of conflict in the regulatory
environment of financial services in Zambia leaving room for regulatory arbitrage and
bureaucratic tendencies to creep in. Technological improvements and globalisation have
resulted in the emergence of complex financial structures which have blurred the
traditional product boundaries among the banking, securities and insurance sectors as
products and financial service activities are becoming more integrated.

54. The structure of the financial services sector throughout the world is undergoing
dynamic changes with changing operational framework on markets and of the attendant
risks, which have resulted in more innovative risk management techniques.

55. In the light of the above changes, there is a view that a single integrated body
responsible for overall supervision would create an enabling environment for better
convergence of policies by bringing all regulatory functions together in a harmonious
manner. Compared with single specialist regulatory agencies, the merit of the integrated
approach is the lower likelihood of specific regulatory gaps within the same or different
regulatory jurisdictions.

56. The issue of whether to have separate specialist bodies or a unified supervisory
agency and the manner in which the integrated regulatory body would be structured and
managed and how to implement and manage the integration process and at what point a
country should consider a shift to a unified body continues to be debatable.

57. Technological advances and the associated extensive use of new technology and
related practices, inter-linkages, globalisation and inter-dependence of the banking,
securities, pensions and insurance sectors pose challenges for economic policy issues and a
coherent structural reform and timely response from the policy makers to address this is
cardinal at this stage of the development of the Zambian financial sector.

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58. So far in Zambia, reforms and updating of the legislations have been ad hoc and
piecemeal as can be seen by the many un-coordinated reviews such as the on-going reviews
of the laws. There is a need for coordination in the harmonization of the various pieces of
legislation.

1.7.1 Constraints and Issues

59. Below is an illustration of some of the areas of overlap in the regulation of

institutions and asset classes, which have resulted in their being subjected to multiple
regulatory regimes:

i. Commercial banks the main regulator is the BoZ but there have been cases where the
banks have been involved in the issue of Corporate Bonds as recently undertaken by
Barclays Bank, which involved and will continue to involve the Securities and
Exchange Commission as well as the provision of custodial services.
ii. Merchant banks the merchant banks such as Cavmont Merchant Bank and Investrust
Bank (before it changed its name) have largely operated as commercial banks with very
little fee income generated from advisory or underwriting services provided. As such,
they have tended to be regulated by the BoZ and only when they are involved in the
floatation of securities have they attracted the SECs intervention.
iii. Discount houses are mainly regulated by the BoZ but their recent involvement in
collective investment schemes have had to bring them under the ambit of the SEC.
iv. Pension Funds pension funds were for a long time unregulated until the Pension
Scheme Regulations Act came into being in 1996. The Act is flawed and has a lot of
areas that require streamlining. Prior to its enactment, pension schemes were only
required to register with Zambia Revenue Authority for tax exemption purposes but
their operations were largely unregulated. With the establishment of the PIA there is
now some limited supervision being undertaken albeit ineffectively due to the limited
capacity of the regulatory body itself. Areas of conflict exist in the pensions arena, as
there are multiple regulators and organs concerned with the management of pension
funds. For example, the current Pension Scheme Regulations Act does not provide for
specific regulation of statutory bodies such as LASF, NAPSA and the Public Service
Pensions Fund and only does so in as far as prudential fund management principles are
concerned. The PSPF, for example, reports into the Office of the President which is a
superior body compared to the regulator, the PIA, which only operates as a department

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of the Ministry of Finance which set up poses a lot of supervisory and operational
problems for the PIA.
v. For fund management functions the relevant organs are the PIA, SEC, ZRA and to
some extent the BoZ. For scheme management there is also the involvement of the
Ministry of Labour and Social Security and the Ministry of Lands for the registration
and incorporation of Trust Deeds under which the schemes operate.
vi. Insurance companies are ordinarily regulated by the PIA. However some of their
products such as ZSICs Swiftsave savings scheme attracted SECs intervention.
vii. Building Societies by their very nature are supposed to be involved in long-term housing
finance and mortgage products such as long-term bonds, which are the preserve of the
capital market regulators such as the SEC but recently building societies have been
brought under the supervision of BOZ in a manner that is not fully structured.
viii. Collective Investment Schemes (CISs) by their nature CISs are a capital market product and
thus subjected to SEC regulations. Increasingly, because of the need to have some of
these products as approved areas of pension fund investment, this has attracted the
PIA.
ix. Securities business for brokers and the Lusaka Stock Exchange among others are still
under SEC. Secondary trading of Government Bonds on the LuSE, also presents
another area of potential conflict because of the involvement of BOZ who are the
primary issuers.
x. Development Financial Institutions these were unregulated and it is only recently that
institutions such as DBZ have come under the BOZ supervision although the
supervisory framework is yet to be developed.
xi. Venture Capital Funds / SME/ or private equity and investment advisory services have
generally been unregulated apart from the need for them to register with SEC

60. As a result of serious overlaps and conflicts in the existing law applicable to the
financial sector, the operations of the following bodies pose regulatory challenges: building
societies, NSCB, DBZ and venture capital funds (including Zambia Venture Capital Fund,
the SME fund recently launched by KCM and Cavmont-FMO Fund).

61. Asset management companies and companies providing investment advisory and
other financial services are subject to conflicting regulatory regimes giving rise to regulatory
arbitrage .

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62. Annuities businesses, which are supposed to be a function of insurance companies,

are still being undertaken by pension houses in Zambia.

63. Commercial Credit Institutions including moneylenders have no proper regulations

or supervision of their activities undertaken by any specific regulatory agency.

1.7.2 Recommendations

i. Pass appropriate legislation to facilitate integration of the financial sector;

ii. Undertake a study to review the current regulatory structures to identify the most
appropriate regulatory model that mirrors the evolving business structures of financial
institutions in Zambia.

1.8 FINANCIAL SAFETY NET

64. The stability of the financial sector is cardinal for the efficient functioning of the
economy. Banks form the largest and most important component of the financial system
and in most third world countries provide the only channel for financial intermediation.

65. The Zambian financial system has been faced with a serious threat of financial
instability due to the failure of a number of financial institutions over the last 12 years. This
has been of great concern both to the BoZ and the government because of the numerous
adverse effects that these failures have had on the financial sector and the economy as a
whole. These include:

i. Erosion of confidence in the financial sector, especially in the indigenous financial

institutions. This has resulted in the shifting of deposits from indigenous banks to
foreign or state-owned banks which were perceived as being safer because of strong
parent support, in the case of foreign-owned banks, and implicit government guarantee
in the case of government-owned banks;
ii. Unplanned government expenditure. Bank failures have cost the government an estimated
K110 billion;
iii. Loss of customer deposits resulting in suffering, especially among personal depositors;
and

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iv. Disruption in the payment system caused by the temporary loss of transactions media,
disruption to the orderly conduct of business due to the breaking of pre-established
lines of credit and other business relationships.

66. In order to address these issues, most countries have established financial safety
nets aimed at increasing the safety and stability of the financial system and to boost
confidence in their financial system. A financial safety net consists of three pillars namely
deposit insurance, the lender of last resort function, regulation and supervision. These
pillars operate together to provide an institutional framework that is aimed at stabilising the
banking system by preventing bank runs and, where they occur, protect and minimise the
losses suffered by depositors.

1.8.1 Legal infrastructure

67. Currently, Zambia only has a well functioning bank regulation and supervision
structure. However, the lender of the last resort function is not well defined. Deposit
protection has been recognised as the missing link in the safety net which when
introduced, would help resolve some of the problems arising from bank failures. It must be
noted that in jurisdictions were entry into the banking system is limited, the economy is
static and prudential regulation of banking activities is strong, there may be no need for
deposit protection.

68. As regards the lender of last resort function, until recently, the BoZ had no laid
down policies or procedures in place that guided whether, when and under what
conditions support would be given to financial institutions in distress. Neither was there
an attempt to determine whether there was, in fact, a systematic threat. The situation was
exacerbated by the fact that the clearinghouse rules were fairly lax in the need for banks to
have sufficient collateral to be permitted into clearing.

69. Zambia currently does not have a deposit protection fund and there is no
supportive legal framework in place.

70. Arising from Zambias experiences with financial institutions failures, the BoZ, in
consultation with other major stakeholders, has been looking into the establishment of a
deposit protection scheme. To this end, the BoZ has come up with draft legislation for
consideration and possible adoption into law by Parliament.

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71. The BoZs authority to act as lender of last resort is contained in section 42(3) of
the BoZ Act of 1996. Section 42(1) authorises the BoZ to operate accounts for banks and
other financial institutions on such terms and conditions as the Board may determine. The
Act provides for the Bank to lend to such account holders where it feels it is necessary to
meet liquidity requirements or forestall insolvency to safeguard the financial system. This
lending can be on such special terms and conditions as the Board may determine and may
or may not be secured. The Act further provides for the granting of secured advances for a
period not exceeding six months. The security obtainable for such advances is specified in
section 42(2)(b)(i) (iii).

72. It can be seen that the provisions of the Act gives the BoZ a great deal of
discretion and flexibility in terms of granting advances to financial institutions. To date,
BoZ has granted advances to a number of banks at various times. Some of these banks
have since been placed under curatorship, receivership or liquidation.

1.8.2 Constraints and Issues

i. The lack of central bank independence has resulted in recommendations and decisions
made by the BoZ being overridden by the Ministry of Finance and National Planning.
This has been a major contributing factor to the manner in which BoZ has exercised its
lender of last resort function and consequently, the losses it has had to sustain.
ii. Absence of mechanism for assessing whether a bank closure would result in a
systematic crisis warranting BoZ assistance.

1.8.3 Recommendations

1.8.3.1 Deposit Protection

73. Enact the Deposit Protection Bill for eligible deposit-taking financial institutions.

1.8.3.2 Lender of Last Resort

i. Codify into law rules to guide BoZs intervention in the bank industry. This will enable
the BoZ to take prompt corrective action and reduce the effects of regulatory
forbearance. Making supervisory responses mandatory limits supervisory discretion and
offsets the pressure on bank supervisors to delay prompt corrective action.

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ii. Nature of Support to be given: The nature of support to be given should be broadly
classified into three types:

a) Preconditions for overnight facility

Overnight facility: banks are provided with support in situations where they face
shortfalls resulting from the miscalculations of liquidity
requirements, for instance:
Short-term facility support given to banks facing funding problems on a short-term
basis;
Long-term facility support given to banks whose funding problems are not of a
short-term nature

74. The following preconditions are recommended for each of the above facilities.

b) Preconditions for short-term facility:

(1) The failure of the bank would pose a systemic threat;
(2) The bank is capital solvent;
(3) The bank has adequate collateral;
(4) The bank has exhausted all other means for meeting its funding needs;
(5) The shareholders have reasonable attempts to provide liquidity support as a sign
of their commitment to the bank;
(6) Management is considered fit and proper;
(7) The banks liquidity problems are not due to management fraud and
(8) The Bank has a viable plan to deal with its liquidity problem.

75. For the short term facility, the support should be provided for an initial term not
exceeding thirty days for instance with a provision to roll over for another thirty days if
necessary. This period should provide sufficient time for the BoZ to do a due diligence
study and enable it to assess whether it is likely that the institution will be able to resolve its
liquidity problems. If not, BoZ should prepare a course of action to be followed if the
institution is found to be insolvent. Like in the case of overnight

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76. facilities, support should be given at an interest rate sufficiently high to encourage
the banks management to resolve its problems but not too high that it would be too costly
for the bank and may cause it to become insolvent.

c) Preconditions for the long-term facility:

77. For the long-term facility, some of the pre conditions listed above may not apply.
For example, the institution will most probably be capital insolvent and may not be able to
provide sufficient collateral. For this type of facility, more discretion is likely to be used.
The overriding factor in making these decisions in these circumstances should be the
implications of the banks failure on systemic stability.

iii. Central Bank independence: The BoZ should have operational independence because as
long as its decisions can be overridden by a higher authority, it will most probably
continue to sustain losses in exercising its role of lender of last resort.

1.9 REGIONAL INTEGRATION

78. Africa faces multiple challenges ranging from poverty, poor health care, civil war
and other types of political conflict. Additionally, Africa is the most sub-divided continent
with 165 borders dividing the 51 countries. The international community has taken
cognisance of this and has undertaken to tackle the numerous developmental issues
affecting the continent. Increasingly it has been felt that regional integration will provide
the panacea to accelerate Africas development. According to the Economic Commission
for Africa and the World Bank, a regional integration approach to development is likely to
increase the competitiveness and growth of African economies by improving economies of
scale. It is also likely to maximize its integration with the global economy, create strong
institutions to tackle regional conflicts and create an enabling environment for accelerated
development of business activities. A regional integration approach may also lead to the
creation of a strong, institutional capacity to address political problems in the continent.

79. Zambia is a member of the Southern African Development Community, a

community consisting of 13 countries and, whose ultimate objective is to build a region in
which there will be a high degree of harmonisation and rationalisation of systems to enable
the pooling of resources to achieve collective self-reliance in order to improve the living
standards of the people of the region.

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80. The Objectives of the Community as stated in the Treaty are to:

i. Achieve development and economic growth, alleviate poverty, enhance the standard and
quality of life of the peoples of Southern Africa and support the socially disadvantaged
through regional integration.
ii. Evolve common political values, systems and institutions.
iii. Promote and defend peace and security.
iv. Promote self-sustaining development on the basis of collective self-reliance, and the
inter-dependence of member states.
v. Achieve complementarities between national and regional strategies and programmes.
vi. Promote and maximise productive employment and utilisation of resources of the
region.
vii. Achieve sustainable utilisation of natural resources and effective protection of the
environment.
viii. Strengthen and consolidate the long-standing historical, social and cultural affinities and
links among the peoples of the region.

81. Zambia is also a member of the Common Market for East and Southern Africa an
organisation consisting of 21 member states whose overriding objective is economic
prosperity through regional integration.

82. With particular reference to the financial sector and in order to achieve the
objectives of these two bodies, there have been a number of initiatives in the integration in
the financial systems of the member countries of these bodies and a number of committees
have been formed to oversee this process. These include:

i. The Committee of Insurance, Securities and Non- Bank Financial Authorities;

ii. The SADC Committee of Central Bank Governor;
iii. SADC Committee of Stock Exchanges;
iv. The SADC Committee of Supreme Audit Institutions; and
v. Committee of Bank Supervisors in the COMESA region.

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83. The initiatives under the Committee of Insurance, Securities and Non- Bank
Financial Authorities can be summed up to include market development, market
integration and systemic risk and their development agenda is envisaged to be at two levels.

i. Coordinate an assessment of every members legal and regulatory framework and

practices in terms of the IOSCO objectives and principles through self-assessments and
verified by peers to identify improvements that need to be made; and
ii. Assess the level of development of the various constituent elements of capital markets,
insurance and retirement funds in each member country. This would include product
availability, level of competition and depth of barriers to development.

84. The Committee of Central Bank Governors has equally made strides in achieving
integration and harmonisation of standards and practices in the financial sector. The BoZ
has just commissioned Bank Supervision Applications, a project which is designed to
achieve the vision of a sound and harmonised legal framework, an internationally accepted
minimum reporting, disclosure and prudential standards and a common and effective
enforcement measures.

85. Zambia has also completed a National Payment System vision, whose objective is
to facilitate global and regional integration and provide a secure domestic payments system
for the country. This fits into the both SADC and COMESAs vision of free trade and
cross border payments. Under the SADC Payment System Project, the Committee of
Central Bank Governors recommended a suitable Interbank Settlement System for SADC
members. This will be based on Real Time Gross Settlement System (RTGS) and is
supposed to be commissioned in 2004. The COMESA Cross Border Payments vision
envisages a regional payment system, which is premised on the basis of RTGS. It is in line
with these that Zambia is in the process of introducing the Zambia Inter bank Payment
Settlement System, which is also based on RTGS.

1.9.1 Constraints and Issues

i. Potential difficulties in managing the wide variations in the socio-economic development

of African nations;

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ii. Different levels of development in infrastructure among members in the financial

systems of member countries. This poses challenges in synchronising the architecture in
the different financial systems;
iii. Different laws obtaining in the different countries may prove to be a hindrance in
effective integration in various sectors of the financial sector;
iv. Lack of resources among some member states to create and sustain regional structures
and mechanisms;
v. Competing demands brought about by belonging to more than one regional economic
grouping; and
vi. Weak capacity at national level to implement regional protocols.

1.10 PREVENTION OF MONEY LAUNDERING

86. The Prohibition and Prevention of Money Laundering Act 2001 (PPMLA) was
promulgated in the year 2001. The Act provides for the creation of an Anti-Money
Laundering Authority to be chaired by the Attorney General and an Anti-Money
Laundering Investigations Unit (the Unit) to be chaired by the Commissioner (who is a
member of Anti-Money Laundering Authority). The Act defines that the Commissioner is
a person appointed as Commissioner under the Narcotic Drugs and Psychotropic
Substances Act.

87. As per the Act, the Anti-Money Laundering Authority is required to provide
general and specific policy directives to the Commissioner and the Commissioner has to
give effect to such directives as one of its functions. The Unit has several functions. Apart
from its main function of collecting, evaluating, processing and investigating financial
information received from the regulated institutions, it has to assist in developing training
programmes for use by regulated institutions and Supervisory Authorities in
implementation of the Act, to supervise reporting requirements and other administrative
obligations imposed on the regulated institution and Supervisory Authorities.

88. Almost two years have passed since the said Act was promulgated, and progress
has been slow. The Anti-Money Laundering Investigations Unit has now been established
under the Drug Enforcement Commission (DEC).

89. In addition to the inertia in establishment of the various functional arms of the
Money Laundering Authority, appropriate steps have not been taken in educating the

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general public/creating public awareness about money laundering activities. The Unit has
also not yet come up with appropriate training programs through which the regulated
institutions can impart training to its staff members in mechanisms for preventing money
laundering, techniques in the recognition and handling of business transactions carried out
by or on behalf of any person who is or appears to be engaged in money laundering
activities.

90. The Act provides that a regulated institute shall report to the unit any transaction,
which gives reasonable grounds to believe that a money laundering offence is being, has
been or is about to be committed. The expression reasonable grounds to believe leaves
considerable room for interpretation and therefore, the ground staff at the regulated
institutes have become vulnerable to the various provisions of the Act.

91. The Act, though requires reporting to be made, does not specify any threshold
beyond which the transactions have to be reported. The Act does not specify any format in
which reporting is to be made. The Unit / Supervisory Authorities have yet to come out
with any such format. There is no doubt that the suspicious transactions irrespective of any
limit/threshold need to be reported. However, to enable the Unit to investigate the
transactions, considering that ours is a cash economy, it is required that the Unit should
also gather information on transactions beyond a threshold and that too in a standardized
format.

92. As ours is a cash economy, majority of the transactions are performed in cash and
in the absence of any centralized database of suspected persons, absence of any mechanism
to establish true identity of the documents submitted for identification, there is a general
feeling amongst the operating staff that they may be unfairly singled out by the Unit for
failing to enforce various provisions of the Act. Moreover, the ground staff is under fear
that they may attract lawsuits if they disclose the information about customers transactions
to the Unit in the absence of specific protection offered under the Act. The provisions of
section 14 of Act viz. it shall not be unlawful for any person to make any disclosure in
compliance with this Act are seen inadequate in this regard.

93. The Supervisory Authorities are expected to issue appropriate directives in the
prevention of money laundering activities to the regulated institutions they regulate. They
are also required to report to the Unit the information relating to financial and other
business transactions suspected to be part of money laundering. This requires that the

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Supervisory Authorities should have a mechanism developed to collect such information.

However, most Supervisory Authorities have yet to issue such directives and establish a
mechanism for gathering such information.

94. The BoZ however is in the process of drafting such regulations for the banking
and non- banking sector and these are expected to be in place in 2004.

95. The BoZ in 1998 issued guidelines on the customer identification. The banks
and other players in the financial sector have taken steps in implementing these guidelines
and also the provisions of Act on their own. However, the absence of policy guidelines and
regulations and weak enforcement by the BoZ, the steps being taken by banks on their
own may prove non-effective in prevention of the money laundering activities.

96. It is also recognised that there is no proper co-operation among the Supervisory
authorities. Information and data on persons involved or suspected to be involved in
money laundering activities should be shared by the players in the market.

97. In the absence of a centralized database of person/s involved/suspected to be

involved in the money laundering activity, the players in the market are vulnerable to the
risk of opening accounts of such persons.

98. FATFs eight special recommendations on terrorist financing need to be

incorporated in the Act to become fully compliant in this regard.

1.10.1 Constraints and Issues

99. The supervisory authorities have not yet put in place the necessary mechanism for
issuing appropriate policy guidelines and directives to financial institutions. Further,
education and consumer awareness of the adverse effects of money-laundering is still low

1.10.2 Recommendations

i. All supervisory authorities should set up a separate internal unit specifically to deal
with/address all issues relating to the prevention of money laundering activities and for
effective implementation of the various provisions of the Act. The supervisory
authorities should, in addition, issue appropriate guidelines/regulations for their

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various jurisdictions and ensure that the institutions they supervise comply with the
regulations and the provisions of the Act;
ii. The supervisory authorities should, in consultation with the regulated institutions come
up with a threshold limit and reporting format;
iii. The Unit to come up with appropriate training programmes incorporating techniques
in recognition and prevention of money laundering activities, common documentation
and methods of imparting training so that individual regulated institute could conduct
training to its staff members. Such training should be a continuous one;
iv. FATFs 8 special recommendations on Terrorist Financing need to be incorporated in
Act to ensure full compliance;
v. The Unit and supervisory authorities (along with individual player in the market)
should take appropriate steps in educating the general public/creating public awareness
about prevention of money laundering activities;
vi. Anti- money laundering legislation should be constantly reviewed in order to make it up to
date with developments in the financial system; and
vii. Ensure that Zambia attains full compliance with international standards.

1.11 PAYMENTS SYSTEMS

100. Financial sector development presupposes, in part, a well functioning, efficient and
reliable clearing and payments system. The payments system provides an essential conduit
for the circular flow of money and execution of monetary policy. In addition, properly
designed payments systems can contribute to financial system stability and promote access
to banking and financial services. Over the years Zambias National Payments System has
had several weaknesses that contributed to undermining the development of the Zambian
financial markets.

101. In the case of the cheque clearing system, for instance, the use of cheques was
declining for a number of reasons including: high frequency of cheques issued against
insufficient funds; delays in clearing funds on cheques; and poor and slow
processing/operational systems in banks. The implication on cheques processing was that
bank customers were at the mercy of their bankers and those that paid by cheque. This
situation also created huge amounts of float as a result of funds being tied up in the
clearing process.

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1.11.1 Constraints and Issues

i. Cash is the main means of making payments. Accessibility to financial services for the majority of
the population is limited and the payments culture in Zambia generally supports cash
transactions;
ii. Legal framework. The current payment system is built on weak legal underpinnings. Currently,
there is no law in Zambia that governs the payment system per se;
iii. Weak risk management systems in payments, clearing and settlement systems; and
iv. Reform and modernisation efforts of the payment systems overly concentrated on banking
participants

1.11.2 Progress Made to Date

102. In an effort to reform and enhance the efficiency of the payments system, the BoZ
initiated a study of payment systems within the region in 1993 and by 1995 was working
together with the Bankers Association of Zambia on reforming the Zambian payment
systems. The objective of the reform has been to formalise an efficient payments, clearing
and settlement system for the Zambian financial system within a clear legal framework.
The following are some of the measures that have been implemented to make the National
Payments System more efficient and reliable:

i. Establishment of electronic clearing. BOZ in conjunction with the Bankers Association of

Zambia introduced an automated electronic clearing system, called Zambia Electronic
Clearing House (ZECH), in 1999;
ii. Zambia Clearing House rules were redrafted: These set clear entry criteria, management of the
clearing house, failure to settle arrangements and reduction in clearing periods;
iii. Improvement of the security of cheque paper and introduction of machine-readable cheques: This
enhanced the security features of cheques and improved the speed of processing and
turn-around time for cheques;
iv. Cutting down on the number of days to clear cheques: The number of days for clearing a cross-
country cheque was cut down from 21 to 10 days. The inter-provincial, along the line of
rail, and local clearing days were reduced to 6, 4 and 3 days, respectively;

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v. Improvements in the banks internal processing procedures: Most banks have deployed systems
that enable the updating of customers accounts from central points;
vi. Introduction of direct debit and credit clearing (DDACC) for payment of bills and salaries. DDACC
was introduced to facilitate transfer of money by electronic means;
vii. Large value clearing system (real-time gross settlement system). Work on this system has advanced
and is expected to be operational in mid 2004. Real time settlement also provides a
speedy and safe alternative for high-value payments;
viii. Legal framework. Research on the legislation in Zambia revealed that the law did not
support a number of best practices. Therefore, the BoZ made recommendations to the
Minister of Finance and National Planning on introducing legislation, which among
other things, will provide a legal framework for electronic and other forms of payment
instruments.

1.11.3 Recommendations

1.11.3.1 Payment Instruments and Infrastructure

i. Encourage payment system participants to develop a variety of payment instruments with emphasis on credit-
push instruments: The decision makers responsible for developing payment instruments will
be encouraged to develop and deploy instruments that can be accessible by a majority of
customers, especially the rural unbanked and those who get wages and salaries by cash;
ii. Promote the use of Electronic Payments: The banking sector and the Zambia Electronic Clearing
House Limited will work out and implement measures that will ensure that bank customers
and non-bank customers utilise Direct Debits and Credits Clearing to make and receive
payments;
iii. Promote accessibility of the payment system to non-bank participants. The BoZ will guard against
access restrictions in various co-operative arrangements in payment systems. All payment
system arrangements should clearly spell out mechanisms for guaranteeing access to
participants, particularly non-bank participants;
iv. Develop and Share of small values payment infrastructure: Currently, the few banks with ATMs and
POS Terminals operate on an individual basis. Measures will be developed and
implemented that will ensure sharing of these facilities by payment system participants,
including non-bank participants. This may be in the form of joint acquisition and
implementation of a switching centre, or a private operator can offer this;

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v. Introduce cheque truncation and code line clearing: The National Payment System should develop
and implement measures to introduce cheque truncation using the imaging system at the
ZECHL and other non-bank participants. At the same time, measures will be taken to
ensure that appropriate technology and communication systems are used to electronically
process all payment transactions countrywide;
vi. Develop centralised banking system by payment system participants. The National Payment System
will encourage participants to upgrade their operational systems to enable both Straight-
Through-Processing and centralised book-keeping of customers accounts to improve
efficiency and customer service delivery.

1.11.3.2 Efficient Payment Practices and Public Awareness

i. Educate the public on payment system issues: The enforcement of agreed rules, regulations and
code of conduct as well as the use of various payment instruments will only be effective if
service providers and customers are aware of them. The BoZ will formulate and
implement public education programs so that the public is made aware of the
developments in payment systems. All payment system participants will develop programs
to educate their customers on risks involved with the payment instruments that customers
will use and the alternatives to various payment instruments offered; and
ii. Introduce regulatory framework for providers of payment services: Legally enforceable rules,
regulations, agreements and codes of conduct need be formulated for each payment
stream. These will be published for the information of all interested parties in order to
ensure sound and open practices.

1.11.3.3 Sound Legal Framework

103. The MoFNP should expedite and finalise the enactment process of the proposed
Payments Systems Act. It is envisaged that promulgation of this proposal into law,
currently with the Ministry of Finance and National Planning, will contribute to building
public confidence in non-cash means of effecting payments

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1.11.3.4 Risk Management

i. Introduce online BoZ settlement system to enable banks to effect high value funds
transfer electronically in real time.
ii. Link ZECHL, LuSE, Commercial Banks and BOZ trading systems to the BOZ
settlement system.
iii. Introduce continuous processing at the ZECHL to enable participants to effectively
monitor and manage their exposures.
iv. Introduce mechanisms to give banks access to their settlement account at BoZ to enable
them manage their settlement accounts.
v. Introduce final and irrevocable same day settlement.
vi. Develop and implement risk management measures and monitoring tools.

1.11.3.5 Effective Management of the National Payment System Structures

i. Reconstitute a broad-based National Payment System Committee: The National Payment System
extends beyond the banking system. Therefore, the National Payment Systems Committee
will be reconstituted as the policy making body on all payment system issues. It will be
composed of representatives from various interests in the payment system. It will also
approve proposals and recommendations from the Working Groups and provide resources
to the Working Groups to carry out their delegated functions.
ii. Form a Payment Systems (Core) Specialised Team: This team will be a joint cooperation among
payment system participants to spearhead the reforms. It will be adequately trained in
payment system issues as part of capacity building for both BOZ and relevant participants.
iii. Establish Payment Systems Working Parties: Various Working groups will be formed to look at
various components of the National Payment System on a need basis. These will have
representation from the Specialised Team and technical representation from other interested
parties relevant to the component being addressed. This will be the second structure under
the National Payment Systems Committee.

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1.11.3.6 Repositioning the National Payment System.

104. Despite recent improvements, the payments system still needs further refinements
to consolidate the achievements so far attained and safeguard it against settlement failure.
Some of the required improvements include:

i. Enhancements to the infrastructure to effectively serve the rural population;

ii. Achievement of Delivery versus Payment on the Lusaka Stock Exchange;

iii. Regional integration and facilitation of cross-boarder payments;

iv. Development of other more accessible and acceptable payment instruments such as
shared ATMs, POS and Electronic Funds Transfer systems to reduce reliance on cash;

1.12 FINANCIAL SECTOR TAXATION

105. As a general principle, it is important that taxation of the financial sector is as

consistent as possible with the basic tax design objectives of equity, efficiency and
simplicity in order to minimise distortion and promote competitiveness and development
of the financial sector.

106. The financial sector attracts particular interest from a taxation point of view
because of three key attributes, namely:

i. The wide array of transactions capable of being carried out in the sector, which make
measurement of income and value-added complicated;

ii. The element of time in the income stream of financial institutions. Unlike other
sectors, financial institutions deal in products and services that are provided over
extended periods of time, and involve varying degrees of risk and profitability; and

iii. The high vulnerability of the sector to market failure and other externalities, which
more than often compels authorities to institute tax or non-tax corrective action.

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1.12.1 Income Taxes on the Financial Sector in Zambia

107. In Zambia for all banks that are registered under the Banking and Financial
Services Act for profits of up to the first K250 million they pay a standard corporate tax
rate of 35 percent with the balance taxed at 45 percent.

108. A final withholding tax rate of 25 percent is withheld on interest earnings of

individual financial institution clients. For other institutions including the financial
institutions themselves a 15 percent withholding tax is levied and it is not a final tax. For
commissions, dividends, royalties, management and consultancy fees is levied at 15
percent. In addition, to the withholding tax a medical levy of 1 percent is taxed on all
interest earnings.

1.12.2 Objectives of Taxation

109. As a general principle, taxation of the financial sector should aim at achieving three
objectives, namely:

i. Equity: The system should define appropriate measurement of ability to pay to guide the
assessment of tax liability;
ii. Efficiency: the system should minimise the distortion imposed on the financial sector for
any amount of revenue collected; and
iii. Simplicity: the system should impose minimal administrative burden to foster compliance.

1.12.3 Constraints and Issues

110. Taxation of the financial sector is invariably a complex undertaking, which brings
out a lot of issues. Policy decisions on taxing the financial sector in a country like Zambia
have to contend with constraints such as:

i. Fiscal constraints: The Government has to contend with a very constrained domestic
revenue base. Financial sector taxation reform has to be carried out in a manner that
protects the revenue base;
ii. Efficacy of Tax Relief: Ordinarily, it is appealing to introduce tax relief to encourage
objectives such as stock exchange listing or household savings, but these schemes often
entail high revenue loss in relation to supposed benefits;
iii. Impact of Corrective Action: Corrective taxation measures are not regularly evaluated and
adapted through closer liaison between monetary, fiscal authorities and stakeholders.

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iv. Inadequate coverage of the formal financial sector: The existence of an informal financial sector
may create unfair disadvantage to players in the formal financial sector who have to
comply with regulatory and tax obligations;
v. The menu of financial assets: available may be too narrow to permit a wide variety of
financial transactions, thus limiting the number of tax handles available within the
financial sector;
vi. High taxes imposed on the financial sector are partly as a result of weak institutional
framework in the tax collection system.
vii. The tax system on the financial sector has increased the cost of financial services to the
local enterprises which has made them not to be competitive in the region.

1.12.4 Progress Made to Date

111. There has been marked progress, and, at the least, explicit commitment of the
authorities towards addressing the issues facing financial sector taxation.

i. Inadequate coverage of the formal financial sector is being addressed by encouraging

financial institutions to mobilise savings, thus bringing more individuals into the formal
financial sector;
ii. The limited menu of financial assets is being addressed by deepening the financial sector
and encouraging financial institutions to devise innovative financial products;
iii. Government is making a sustained effort in addressing the present fiscal constraints by
implementing fiscal and budget reforms; and
iv. Steps have been taken to reverse extension of tax incentives aimed at achieving
objectives that cannot be quantified in specific revenue or tangible economic benefits.

1.12.5 Recommendations

112. In order for taxation of the financial sector to achieve its objectives of equity,
efficiency and simplicity, it is important that the coverage of the formal financial sector is
as broad as possible and that the bulk of transactions in the economy are conducted
through the formal financial sector. Some key issues that need to be addressed to achieve
this that could be considered are that:

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Key Financial Sectors Issues

i. There must be sustained policy commitment and action by the monetary authorities to
address the existence of the informal financial sector through reduction of transaction
costs and barriers to participation in the formal financial sector;
ii. Financial intermediaries should be encouraged to develop innovative financial products
that will encourage participation in the formal financial sector;
iii. The efficacy of tax relief on the financial sector should be subjected to more vigorous
cost-benefit analysis.
iv. The payments system in the country should be encouraged to develop faster and more
convenient non-cash transaction mechanisms to reduce reliance on cash transactions
v. There should be closer liaison between the monetary and fiscal authorities on taxation of
the financial sector to ensure that the effects of explicit and implicit taxation are fully
associated
vi. Government determination of taxation levels on services in financial sector should be
such as to promote regional competitiveness of the local enterprises.
vii. Government should apply uniform structure on taxation across all sectors including the
financial sector.
viii. Government and the Zambia Revenue Authority should consider whether the financial
sector taxation be approached from an institutional or a financial product perspective.
ix. Government should encourage pension funds and life assurance funds investments in
long term capital projects by extending preferential income tax treatment on income
earned from such investments.

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